Commercial Bank

MAHEAL ANI P. SALIGUMBA

4LM3

OVERVIEW
I.

MEANING OF COMMERCIAL BANK

II.

FUNCTIONS OF COMMERCIAL BANKS

Primary Functions
Secondary Functions

III. CREDIT CREATION OF COMMERCIAL BANKS

IV. TYPES OF COMMERCIAL BANKS
V.

DIFFERENCE BETWEEN COMMERCIAL BANKS AND OTHER

TYPES OF BANK

VI. SIGNIFICANCE OF COMMERCIAL BANKS

I. MEANING OF COMMERCIAL BANK

A financial institution which performs the functions of Accepting
deposits from the general public and Giving loans for investments
with the aim of earning profit.

DEPOSITO
R

BORROWIN
G

LESS BORROWING
RATE

BAN
K

LENDIN
G

HIGH LENDING
RATE

(LENDING RATE) ( BORROWING RATE) = PROFIT

aka SPREAD

BORROWE
R

I. FUNCTIONS OF COMMERCIAL BANK

PRIMARY FUNCTIONS

ACCEPTS DEPOSITS

Collection of money or savings of the public

Accepts in form of current, savings and time deposits.

CURRENT ACCOUNT DEPOSITS

Payable on demand
Can be withdrawn anytime depending upon the balance on the

account
Does not earn interest
Cheque Facilities
Commonly used by businessmen and industrialists

FIXED DEPOSITS

AKA TIME DEPOSITS

Have fixed period of maturity

Cannot be withdrawn anytime
High interest rate
Neither payable on demand nor they enjoy cheque Facilities

SAVINGS ACCOUNT DEPOSITS

Main objective is to save
Can be withdrawn anytime
Combined features of fixed and current deposits
payable on demand
can be withdrawn through cheque

Lower interest rate than fixed deposits

I. FUNCTIONS OF COMMERCIAL BANK

PRIMARY FUNCTIONS

GIVES LOANS AND ADVANCES

Particularly for businessmen and entrepreneurs

Main source of income of commercial banks
Lends to borrowers through cash credit, demand loans
and short-term loans

CASH CREDIT
With credit limit
Withdrawing power depends on borrowers current assets
Interest is charged on the drawn or utilized portion of credit

DEMAND LOANS
No stated maturity
Loan amount is paid in lump sum
Commonly used by security brokers

SHORT-TERM LOANS
Given against some securities
Loan amount can be paid by installment

I. FUNCTIONS OF COMMERCIAL BANK

SECONDARY FUNCTIONS

DISCOUNTING BILL OF EXCHANGE OR BUNDLES

Representation of promise to pay a fixed amount of

money at specific point of time
Can be encashed earlier through discounting

I. FUNCTIONS OF COMMERCIAL BANK

SECONDARY FUNCTIONS

OVERDRAFT FACILITIES

Balance of a bank account in which funds withdrawn

have exceeded funds deposited with agreed limit
Demand loan: can be cancelled anytime without notice
if secured with assets, banks can foreclose on the
collateral in case of failure to pay.

I. FUNCTIONS OF COMMERCIAL BANK

SECONDARY FUNCTIONS
AGENCY FUNCTIONS OF BANK
Bank acts as an agent of customers and gets commission.
1.
2.
3.
4.

TRANSFER AND COLLECTION OF FUNDS

PAYMENTS OF VARIOUS ITEMS
PURCHASE AND SALE OF SHARES AND SECURITIES
COLLECTION OF DIVIDENDS, INTERESTS ON SHARES AND DEBENTURES
ON BEHALF OF CUSTOMER
5. ACTS AS TRUSTEE AND EXECUTOR OF PROPERTY
6. LETTERS OF REFFERENCES

I. FUNCTIONS OF COMMERCIAL BANK

SECONDARY FUNCTIONS

PERFORMING GENERAL UTILITY SERVICES

1. Travel Cheques
2. Locker facilities
3. Underwritting securities issued by government, public
and private bodies
4. Purchase and sale of foreign